This article has been submitted by Bill Rahill, Partner at Sustainability Frameworks LLP and Elizabeth M. White, Principal Strategist-ESG Sustainability at the International Finance Corporation
In the coming years, will the majority of finance in developing countries come from the private sector? If so, through what mechanism, and to what effect? These are the questions on the minds of policy makers and businesses across the globe.
We know that the development community works to ensure that private investments deliver win-win results, by creating long-term value for society, business, and the environment, while also creating and supporting sustainable markets. The 17 Sustainable Development Goals (SDGs), represent society’s aspirations of what some of these long-term wins might look like by 2030.
Underpinning many of these goals is the health of natural capital— the stock of renewable and non-renewable resources (e.g. plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people. Natural capital is a critical input for all business success, and leading businesses are responding to the opportunity embodied by these Goals.
At the same time, pursuit of the SDGs is taking place within a global context of depletion of natural capital, increasing variability in climate, and pockets of uncertainty that can undermine business investment and success.
For instance, it is becoming increasingly evident in a number of sectors that there are fundamental challenges in ensuring an adequate and sustainable supply of natural resources, while also maintaining the multitude of other benefits that these resources provide to society.
How can a company understand the value of these resources and act strategically on this information?
A new standardized framework, the Natural Capital Protocol (the Protocol), can help. By applying the Protocol, companies can identify, measure and value their dependencies and impacts on nature, and use this information as a basis for more effective and sustainable decision-making that builds on traditional risk-management approaches.
The Natural Capital Coalition, and supporting organizations including the International Finance Corporation, launched the Protocol in 2016. Over 270 organizations have joined the Coalition, and many have applied the Protocol, allowing them to improve operational decisions and functions.
The next step is to see how these decisions impact and are affected by the natural landscape in which these companies operate, and how other companies, financial institutions, and governments can benefit from, and enhance this approach.
Rwanda is a good case study. Tea is an important commodity for inclusive growth in the small, landlocked African country. Using the Natural Capital Protocol, an impact investor in the tea sector was able to evaluate its dependencies on natural capital in its supply chain. Using that information, it identified simple measures—such as contour planting—to increase the productivity of the smallholder farmers who grow its tea leaves, reduce rates of soil erosion, and improve water management.
For the farmers, the result is improved livelihoods and ability to access finance in the medium term. For the investor, the evidence proves that the measures to address natural capital dependencies work from a business perspective, and thus have been scaled up and applied on two new tea plantations in the short-term, while providing a roadmap across the entire tea sector in the long-term.
For Rwanda’s government, these methods will contribute not only to its national goal to double tea production in the next 10 years, but also to its commitment to transform its economic activities to low carbon and climate resilience.
In addition, these advances help Rwanda on its path toward achieving its SDG targets. For Rwandans, the benefits are clear, as the private sector and a significant part of the country’s population rely on its natural resources to support their livelihoods and food security (about 90% of the population works in agriculture, mainly as subsistence farmers).
After applying the Protocol with smallholders, the investor measured the farmers’ shared dependencies on nature with other actors in the “landscape/waterscape” or the surrounding environment. The information gathered about the shared benefits of methods of tea production at the landscape level catalyzed consideration of innovative financing to address natural capital dependencies, in this case soil erosion and water trade-offs, within the watershed.
This approach makes it apparent that one company alone cannot solve these challenges. Instead it is partnerships with other companies, financiers and the public sector that will better address these critical issues. The work sparked a dialogue among companies, financial institutions, donors, and the Rwandan government about solutions and how the learning could be used to engage other sectors of the economy.
Additional applications of the Natural Capital Protocol are underway in Indonesia, the Philippines and Colombia. Each case examines whether the enabling factors are in place—such as government strategies/regulations, data, capacity, and champions—to foster adoption of approaches that consider natural capital in business decisions and at the same time protect these resources. The cases also convene interested stakeholders to discuss the best way to encourage natural capital-friendly business models, by building on existing initiatives such as SDGs by the public sector, risk assessments by the financial sector, and technical assistance and advice by civil society groups.
Together, these efforts will truly make natural capital everybody’s business.
Keep up to date with the Natural Capital Coalition on Twitter: @NatCapCoalition
Keep up to date with our series on natural capital here.